Arriving out of breath, in a sweat and almost an hour late, Andreas Utermann assumed he had blown his job interview at Mercury Asset Management in 1989 before it had started. Fortunately for him the firm was cast from a different mould from almost every other company in the City of London. He was offered a job.

£75m: Size of the settlement with Unilever after Mercury underperformed a promised return

Utermann is now chief investment officer of Allianz Global Investors, arguably Europe’s largest asset manager. He said: “I was stuck on the Central Line [of the London underground] for 45 minutes, the train was going nowhere, and it was very warm. When it arrived at the station I just ran. But when I got to the interview, it didn’t matter. It was all about them meeting me.”

Ignoring niceties and cutting to the chase was typical of Mercury. Like its parent, UK merchant bank SG Warburg, which founded an asset management arm in 1969 and floated a quarter of it on the London Stock Exchange in 1987, Mercury regarded itself as a meritocratic organisation standing proudly outside the establishment.

In the mid-1990s Mercury could count more than half the pension schemes sponsored by companies in the FTSE 100 as its clients. In 1997 it was acquired by Merrill Lynch, and it now forms a core part of US-quoted BlackRock, the world’s largest asset manager.

Ian Armitage – former chairman of UK buyout firm Hg Capital, once Mercury’s private equity arm – spoke for everyone who contributed to this article when he described Mercury as “a great firm, a brilliant firm”.

• Something to prove

The company that Utermann joined had been united by a common enemy of sorts. In 1979, Siegmund Warburg, SG Warburg’s eponymous founder, told Mercury’s newly appointed chairman Peter Stormonth Darling to just get rid of the asset management division – he could even give it away for nothing if he wanted.

David Rosier, a former executive director of Mercury and SG Warburg and who is now chairman of London wealth manager Thurleigh Investment Managers, said: “Warburg regarded the asset manager as the poor relation. They thought it was grubby. The incentive was to prove them wrong by being a really successful business.”

It had the benefit of good leadership. Stormonth Darling, whom Rosier said was “very clever at keeping people who were competitive and keeping them happy”, was succeeded as chairman from 1992 to 1998 by Sir Hugh Stevenson, whom Mercury alumnus Elizabeth Corley, now chief executive of Allianz Global Investors, described as “a great man, a good statesman when he needed to be, with genuine charm”.

Underneath the chairman, Carol Galley and Stephen Zimmerman, Mercury’s two co-heads, were highly regarded within the company. Corley said: “I found Carol inspirational. She looked cool, but she had a very warm heart.”

New joiners were welcome regardless of background or – in contrast to much of the City at the time – gender. But they had to prove themselves, no matter what their reputation.

Less-experienced recruits such as Utermann were told to take minutes of the meeting held every morning to discuss investment issues. The minutes were circulated to everyone in the company, and the youngsters had their efforts corrected until they met the standards set. Utermann said it took him two years to get it right.

• Internal rivalry

Everyone was encouraged to put forward their views, but everything was questioned. Corley said: “Heaven help you if you challenged someone at that daily nine o’clock meeting and you hadn’t done your homework. If someone was getting too up themselves, they’d be told so. Upward management that wasn’t sincere would have been death to any career.”

Rivalry between colleagues was fierce. Anne Richards, chief investment officer of Aberdeen Asset Management and formerly in charge of UK institutional portfolios at Mercury, said: “Internal competition was almost more intense than external competition. Carol and Stephen had always fostered it as a way to raise the bar.”

Those who failed to make the grade did not stay long. On the flip side, responsibility was given to those who showed they could take it. Hywel George, a former investment manager at Mercury and now co-founder of wealth manager Integral Asset Management, said he was given money to run when he was just 21 years old.

Mercury attracted people who lived and breathed investment, in particular because – in line with its policy of giving staff maximum responsibility – portfolio managers had the freedom to invest how they thought best. Managers followed no particular investment style, switching their focus from lowly rated value companies to higher-rated growth companies, or from large caps to small caps, as market prospects dictated. Benchmarks did not become important until the 1990s.

James de Uphaugh, who co-founded and is chief investment officer of UK fund manager Majedie Asset Management, said: “People never forgot that they were there to make money for their clients. In the 1980s, risk was the risk of losing money, rather than underperforming relative to a benchmark.”
There was nothing special about their approach to making money – they analysed published data, met companies and took a view on valuations, de Uphaugh said.

• Unilever

But the practice of giving fund managers significant discretion in the management of their portfolios, independent of benchmarks, had drawbacks that only became apparent in the 1990s.

The dispersion of returns achieved by managers became an issue. Mercury’s clients had always received widely different results depending on which individual managed their account; but by the mid-1990s, when investment consultants had become more important, this had become difficult to defend, even though the results were mostly good.

Mercury decided to make its investment process more centralised. This caused frustration among the managers, who felt their wings were being clipped.

In 1996, when one of its long-standing clients, the Unilever pension scheme, asked the asset manager to incorporate a new clause in its contract, Mercury obliged. The new clause said Mercury should manage its £1bn Unilever portfolio so as to avoid underperforming its benchmark by more than three percentage points in any period of four successive quarters.

Mercury would have been better off if it had never agreed to this clause – barely any other active manager has accepted anything like it before or since. However, having accepted it, Mercury – as it later admitted – should have run the portfolio more cautiously. Its positions may not have been foolish, but they were bold. Between January 1997 and March 1998, the portfolio lost a cumulative 9.5% against the benchmark. Unilever took Mercury to court and in 2001, after 28 tense days before the judge, Mercury paid Unilever £75m in an out-of-court settlement.

• Perilous success

The drawbacks to Mercury’s investment approach that were discovered in the 1990s were far from disastrous, even taking the trial into account. Commercially, the company was a great success: between its partial flotation in 1987 and its acquisition by Merrill Lynch 10 years later, it had made a total of 23 times its owners’ money in dividends and capital gain; the £3.1bn Merrill Lynch paid for to buy Mercury was four times as much as Swiss Bank Corporation paid for SG Warburg in 1995.

Dealing with success proved much more difficult. The internal competition that Galley and Zimmerman had fostered so assiduously turned against the company, especially as some employees discovered that their Merrill Lynch golden handshakes were smaller than those of others.

Utermann said: “When I joined Mercury in the 1980s, talking about money was frowned upon. You weren’t working there for money. That changed decisively when Merrill Lynch bought us. It was happening everywhere in the industry, but, in some ways, it spoiled everything.”

Richards said: “You need to pay talented people well, but if money is the only reason they’re there they won’t stay – there’s always someone who will pay more. When Merrill Lynch took over, the money combined with the change in culture lost people’s hearts and minds.”